Last week BCRX received FDA approval for a drug. The market has been anticipating the approval and driving the price up as you can see by the increasing profits in the stock (blue line in the chart below). In response to the good news and jump in stock price we rolled our Dec 18 $4 Calls that we were short to Jan 15 $6 Calls. We purchased the Dec calls for $1.72 and sold the Jan Calls for $1.13 for a debit of $.59. We invested an additional $.59 to increase our short strike price by $1.50. When we do a diagonal roll up to an ATM strike it usually costs $.70 per dollar of roll. The stock was trading above $6 when we did the roll so it should have cost us $1.05 vs $.59 so we are happy with the trade.
The stock is likely to decline “post news” and we might be overly aggressive with the roll to $6 but we do plan on continuing to hold the stock and writing options. Post approval the volatility is likely to decline resulting in smaller premiums when we sell the options in the future.
The covered call strategy on NIO has been an interesting one to manage due to the volatility on the stock. Our return would be higher if we bought and held the stock (+$32,361). On 11/23 (see green section in table below) we added a new element to the strategy with the purchase of a Put hoping we can mitigate the impact of the price swings. In hindsight we overpaid for the “protection” of the put. So far the Put is doing what was intended as it gained value with the recent pull back in price.
Managing the covered call strategy on such a volatile stock is a wild ride. Time will tell if adding the Put element enhances the profitability. It does make us more comfortable to have the additional downside protection and protect the gains we have.
On Jun 1/20 we established a covered call with 200 shares of STE and sale of 2 Jun 19 $155 Call options. Since that time we have developed the position by adding additional shares (performance was good so we added more shares) and rolling the calls 7 times. Overall the performance has been similar to just owning the shares. We also collected three dividends.
We are pleased with the performance of the STE covered call strategy and plan on continuing to roll the options and keep the shares for at least 12 months so we reach long term capital gains status.
Aided by a good market our account continued to bounce back from the dip in late October. Account is up $38,015 or 15.3% with one day left in the month. YTD it is up $128,240 or 65.5%. In November we started experimenting with a method of protecting against big dips.
In three of the positions (NIO, PYPL and SDC) we added purchasing an ITM Put with a longer DTE (Days to Expire) than the Call we are short. The strike price of the long Put is determined by taking the strike price of the call we short – premium received *.98. This is “insurance” to cap our downside on a couple of the more volatile stocks in the portfolio. It will take several months of tracking to evaluate if the cost of “insurance” improves our performance (the short put will generate profit if the stock dips below the strike price). The idea comes from a contributor on Optionsbistro.com. As much as I like the 13.5% increase in November I didn’t like the huge hit in October. Hopefully the long Put will help cushion any quick drops.
We have eight “positions” or strategies open in the account. Seven of the eight are making money. Overall the open positions are generating profits of $67,118. Our short calls and puts are not contributing to overall profitability as only two of the eight option strategies are positive contributors. Not sure how the addition of the Long Put strategy will impact Option Profitability over time.
On 11/16 we took a different approach to establishing a new covered call position on Smile Direct Club (SDC). The stock was beaten down after a good earnings call. Rather than buy the shares and sell call options we wrote Nov 20 $9.50 Puts for a credit of $.49. The stock went up and on 11/18 we purchased the Puts back for $.03 and sold Nov 27 $11 Puts for a credit of $.27.
On 11/20 we were assigned the 2,000 shares at $11. Out net price for the shares was $11 – $.46 – $.27 or $10.27 per share.
Following assignment we established the covered call by writing Nov 27 $12 Call options for a credit of $.45.
As of 11/14 we had a profit of $2,060 on the shares, profit of $1,798 on the options and a combined profit of $3,858 in 8 days, ROI of 17.5% or 800% annualized.
This is the first time I have used naked puts and assignment as a strategy to establishing a stock position then selling call options against the newly acquired shares. In this instance it seems to have worked out well…..but selling naked puts creates a temporary position with unlimited loss so you really need to be committed to owning the stock no matter what happens.
On Oct 12 we established a BuCS on REGN purchasing May 21 2021 $600 Calls and selling Oct 16 2020 $620 Calls. Within a couple days of establishing the position the price of REGN deteriorated and has continued to remain down despite a couple of bounces. We rolled our short option position 9 times generating $10,131 in premiums but not enough to offset the $15,125 loss on the long call.
We remain optimistic on the position. Not sure why the stock hasn’t recovered more. Covid cases on a global basis are hitting record daily highs and REGN has one of the only proven treatments. Vaccines will eventually help contain the virus but a lot of opportunity exists for REGN in the interim period.
Over the past month our IB account has reflected the market volatility. The account dropped from a high just of $347,000 to under $287,000 then bounced back to $315,000. In the charts below you can see the impact of the individual stocks. DXCM, SDC and PTON have had a rough couple of weeks. I will continue to hold the stocks and sell options against as I believe in their long term prospects. PTON was hit hard with the news about the vaccine…..so I did purchase more shares on the drop. PYPL is a wild ride. I like the stock, liked the quarterly results but it moves around so much it is difficult to make money with.
Last week was a tough week for my covered call positions. Price decline in many of the stocks exceeded the protection offered by the call premiums. Over the past two weeks I would have been far better off with some “collars” (use call option premium to purchase an OTM Put option to establish a floor on potential losses) to protect on the downside. Collars would prevented the loss of tens of thousands of dollars on DXCM, PTON, SDC across my accounts. I have used collars before…..and like most people it seemed like I was wasting my money on the “insurance”. When the stocks didn’t drop it felt like you just gave away the money…..but I would have gotten everything back in last few days.
YTD the IB account is outperforming the S&P by 50%. Good result…but it look much better at the end of Sep than Oct.
Hope the election results are conclusive one way or the other and we see more stability by the end of the week.
Dexcom announced excellent quarterly results…..which resulted in a $90 drop in the stock price. I copied the earnings announcement at the bottom of the post.
How to react when one of our stock implodes …..
The “covered call” offered some protection (it was sold for $28.82 a share or $57,640 on 10/16) but the drop (2,000 shares x $90) resulted in losses far beyond what the call premium could offset.
Dexcom has a history of big swings around earnings so we expected some volatility but nothing this extreme. Based on the earnings announcement and content of the call we decided to purchase more shares as it dropped. We purchased shares at $349 when we started to see a bounce…..but we should have waited as the stock bounce was short lived and hit a bottom just over $330. The stock did bounce back from the bottom to $349 by the end of the day. We don’t anticipate hanging onto the incremental shares but selling if the shares continue the upward trend.
We also rolled our 20 Nov 20 $410 Call options to Dec 18 $370 Calls for a credit of $18.22. Things were happening very quickly when I did the roll down…..and the Schwab system defaulted the Dec 18 option into the Diagonal Roll template when I thought it was Nov 20 option. I didn’t notice the Dec date until the confirmation came in. I might roll this back to Nov 20 today as I feel the stock will come back over the next couple of weeks.
It is hard to watch a position devolve and see tens of thousands of dollars disappear from your account. Knowing how you will react helps…..but it is still tough emotionally….and makes you wonder what else you should have done to prevent the loss.